A Lack Of Confidence
April 19, 2024 -- Thirty-year fixed mortgage rates bounded back across the 7% line this week, not that they had to rise all that much to achieve this. At present, they have returned to roughly in the middle of the range set between last fall's highs and this winter's lows. The upward push then was fostered by worries regarding continued rate hikes by the Federal Reserve, followed by expectations that as many as six or seven cuts in rates this year would come. Both sets of expectations proved unfounded, and when more moderate outlooks incorporated as many as three cuts in short-term rates this year, mortgage rates firmed up from January bottoms.
In recent weeks, hopes for even three cuts this year seem to have been diminished to perhaps one or two, and the timing of the first cut in rates has been pushed further into the future. At a forum in Washington this week, Fed Chair Jay Powell noted that "The recent data have clearly not given us greater confidence [that inflation will return to 2% soon] and instead indicate that it's likely to take longer than expected to achieve that confidence."
Expectations for the path of monetary policy have been reset considerably in less than six months' time. Although inflation hasn't roared back, it has firmed up of late and is proving to be more durable than hoped, and a smooth, easy path to the Fed's 2% core PCE goal isn't turning out to be the case. To return to a place where rate cuts become the next steps for monetary policy, we'll need to see at least two to three more very mellow inflation reports to re-instill in the Fed the confidence it had back in January.
We won't need to wait very long to hear the Fed's updated thinking on the topic. The next Fed meeting bridges the end of April and start of May.
Next week will bring the first look at GDP growth for the first quarter of 2024 which, at least according to the GDPNow model at the Federal Reserve Bank of Atlanta, should come in at about 2.9% for the period. That would be a deceleration from the final 4Q23 level but at a pace above the economy's "potential" or ability to grow without generating inflation. That said, there are often differences between what the GDPNow model forecasts and the actual level of GDP growth so we'll need to wait to see whether the interim figure is running high or low.
We do know that the economy has turned more mixed lately, at least anecdotally. The latest Beige Book from the Federal Reserve certainly didn't make it seem as though some booming economy is happening, at least not during the six-week period from late February through early April. The overall characterization for the economy said that it "expanded slightly, on balance" compared to the prior period. While there have been large increases in hiring to start 2024, the labor market was described as having risen "at a slight pace overall, with nine Districts reporting very slow to modest increases, and the remaining three Districts reporting no changes in employment." We know from official releases that inflation hasn't been cooperating with expectations for moderation, but even so "Price increases were modest, on average, running at about the same pace as in the last report." [January through early February]. During that time, "price pressures persisted during the reporting period," so the situation doesn't seem to have changed much, for better or worse.
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The strong job market in and of itself isn't an inflation concern, at least according to Fed Chair Powell at the last post-FOMC press conference. However, wages running strong are a concern, but they do have positive effects on income, savings and spending. Retail Sales powered 0.7% ahead in March, and have posted solid gains over the last two months after a very subdued four-month string. The so-called core measure for retail sales (no auto sales, no gasoline-station sales) was even stronger with a 1% gain. Nonstore retailers (internet sales) led the way with a 2.7% monthly increase but general merchandisers, building materials and food both inside and outside the home contributed, too. One item to bear in mind here is that retail sales aren't adjusted for price changes, so some of these percentage gains are from costlier items rather than an increase in unit sales. As such, some of the gains in retail sales may be coming from price increases rather than strengthening demand.
Optimism among the nation's homebuilders remained flat at a modest level in April. The National Association of Home Builders Housing Market Index came in at 51 for this month, unchanged from March. The measure tracking current sales for single-family homes edged up one tick to 57, but there was somewhat less optimism regarding the spring-to-fall period, as this component eased two points to a still-strong 60. This continued enthusiasm comes despite foot traffic at sales offices and model homes that remains quite subdued at 35, although this is the highest this measure has been since last August. Builders have benefited from the lack of existing homes on the market, and the intractability of that situation may be helping to keep home builders more cheery than not.
The NAHB also reported that builders continue to use incentives to help move homes, although with the advent of the typical spring pick up in buyer interest these have lessened somewhat. About 22% of builders offered price concessions in April with an average price cut of 6%, down from February's 24% offering price reductions. Some kind of incentives were offered by 57% of builders, down from 60% as winter came to an end.
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That homebuilder optimism wasn't dented by the 14.7% decline in housing starts in March is a bit of a surprise, though. New home construction was begun at an annualized 1.321 million pace in March, dropping back after an outsized (and probably good-weather-fueled) February reading. Single-family starts dropped off by 12.4% to a 1.022 million annual rate, still solid enough, while multifamily starts were estimated to have plummeted 21.7% to a 299,000 annual rate. Permits for future construction declined too, sliding by 4.3%, with single-family permits slipping to about a four-month low level.
Based on the National Association of Realtors Pending Home Sales Index from February, we suspected that there would be a slowdown in home sales for March, and there was. The Realtors reported that existing home sales declined by 4.3% last month, sliding back down to a 4.19 million annual rate. The slowing in sales did help the inventory-to-sales ratio improve to 3.2 months of supply at the current rate of sale, and the actual number of homes available to purchase increased by 4.7% compared to February. However, despite both more homes available and somewhat fewer buyers in the market, home prices stepped higher again, with the median price of a home sold last month rising to $393,500-- some 4.8% higher than the same month a year ago. Even without a robust spring market, it seems very likely that we'll set new median home price records again this year, as the all-time peak (August 2022) is only 5% above the current level.
At best, there were already mostly modest expectations for the spring housing market, and headlines reading "7% mortgage rates" aren't likely to provide additional optimism to potential buyers. The $44.31 difference in monthly payment on a $300,000 loan from last week's average 30-year FRM rate to this week's isn't all that much, but it's certainly unlikely to be welcomed by potential borrowers. Already sluggish home sales seem likely to continue to be that way for the foreseeable future.
For more about housing market conditions this spring, see our discussion piece called "What's holding back housing?" There's more contributing to adverse conditions than you may think.
Manufacturing activity has turned more mixed of late and is showing some signs of slowly emerging from a long, difficult period. Two local reports of factory activity from the Federal Reserve Banks of New York and Philadelphia reflect this, with one finding traction and the other seeing none. The FRB/Philadelphia's local gauge posted a reading of 15.5 for April, its highest mark in two years and one that is now part of a three-month string of gains. New orders pushed higher, posting a 6.8-point gain to 12.2 for the month. However, employment conditions remain unfavorable, with the -10.7 mark for April about as weak as have been two prior monthly readings. As far as price inputs go, they remain subdued, although considerably less so at a value of 23.0 for April compared against a meager 3.7 level for March.
This relatively good manufacturing news from the third Fed district didn't spill over next door into the second district, as the Empire State Manufacturing Index from the FRB/New York remained soggy. The headline figure here retreated by 6.8 points to -14.3 for the month, held down by a -16.2 reading for new orders. The employment metric improved two points to a less-poor -5.1, but prices paid by manufacturers in this district kicked upward a bit more, with the 33.7 value for this component the highest it has been since last May.
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Overall Industrial Production posted a second consecutive 0.4% increase. The latest reading covering March was lifted by a 0.5% rise in manufacturing output, which now sports back-to-back gains. Mining interests continued in a backing-and-filling pattern that has been in place for a few months now, and March was a backup with a 1.4% decline. Utility output can be affected by weather and the advent of some warm temperatures in the south last month likely meant more air conditioners drawing power. As such, utility output expanded by 2% for the month, rebounding a bit after a 7.6% decline in February. The percentage of industrial production floors in active use ticked two tenths of a percentage point higher to 78.4% last month and is creeping higher again.
No longer creeping higher is the Conference Board's index of Leading Economic Indicators. After a recession-suggesting 22-month string of negative values, the LEI posted a positive figure in February, but it failed to stick, as March returned to negative territory with a 0.3% drop. The LEI purports to foretell economic conditions in the coming months, but may better reflect the conditions in the month in which its components are gathered. Regardless, the LEI (like the Beige Book above) doesn't seem to be pointing to a strengthening economy, so perhaps the recent firming of inflation isn't all that permanent.
Initial claims for unemployment benefits remain as low and stable as they have been. In the week ending April 13, another 212,000 requests for assistance were filed across the U.S., exactly the same number as the week that preceded it and the same figure as has been seen in five of the last six weeks. The labor market appears to be just bumping along at a solid place, with plenty of hiring and few signs of widespread layoffs. Wages are running a tad too warm for the Fed's liking, but if productivity growth can continue near its recent pace that's far less of a concern.
Current Adjustable Rate Mortgage (ARM) Indexes
| Index | For The Week Ending | Year Ago | |
|---|---|---|---|
| Apr 12 | Mar 15 | Apr 14 | |
| 6-Mo. TCM | 5.37% | 5.37% | 4.99% |
| 1-Yr. TCM | 5.12% | 5.01% | 4.68% |
| 3-Yr. TCM | 4.67% | 4.39% | 3.74% |
| 10-Yr. TCM | 4.48% | 4.21% | 3.44% |
| Federal Cost of Funds |
3.889% | 3.876% | 3.139% |
| 30-day SOFR (daily value) | 5.33002% | 5.31864% | 4.66213% |
| Moving Treasury Average (MTA/12-MAT) |
5.114% | 5.088% | 3.744% |
| Freddie Mac 30-yr FRM |
6.88% | 6.87% | 6.39% |
| Historical ARM Index Data | |||
At least recently, higher mortgage rates don't appear to have been all that much of a deterrent to those looking to buy or refinance homes. The Mortgage Bankers Association reported a 3.3% increase in applications for mortgage credit in the week ending April 12, a second consecutive positive mark. Requests for funds to purchase homes rose by 5%, most likely as buyers tried to jump in before mortgage rates worsened, but there was also a small increase in requests for mortgages to replace existing loans. While it was only a 0.5% lift, it came on the heels of a 9.9% increase to start the month, so perhaps at least some homeowners simply don't want to (or can't) wait any longer to pull equity out of their homes. If a homeowner's time horizon is fairly short (e.g. planning on selling and relocating in a year or two) then an increase in monthly payment may be bearable as the time period for increased costs is finite.
If expectations regarding Fed policy have now been reset to essentially "neutral" and inflation doesn't measurably worsen from here, the increase in mortgage rates is probably over. We wrote last week about narrowing spreads and that the effect on mortgage rates from the upturn in long-term yields is being muted somewhat, but this doesn't mean that mortgage rates cannot move higher from here. Instead, it simply means that if spreads were the same as they were 5-7 months ago that we would be looking at even higher mortgage rates in the market, as were seen late last year.
The bulk of the reset for monetary expectations and interest rates seems to have run its course for the moment, but there still appears to be a little as-yet-unrealized upside for mortgage rates, at least based upon market conditions late in the week. Most likely, we'll see a few basis point increase in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac on Thursday. After that, however, the March PCE inflation report on Friday may dictate whether more increases can be expected in the weeks ahead, or whether the first steps to re-establishing the kind of confidence that allows rates to decline again are being taken.
What's the outlook for mortgage rates for much of the spring homebuying season? See what we think when you take look at our latest Two-Month Forecast for mortgage rates, covering April into early June.
To start each year, we release our Annual Mortgage and Housing Market Outlook. In it, we take a forward look at a range of topics, including mortgage rates, Fed policy, home sales, home prices and lots more; come July, we do an interim review of our expectations. Have a look and see if you think we're off or on point with our long-range forecast.
For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".
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